There are plenty of strategies that digital option traders use nowadays. Some of them are very simple and include only one tool. However, to improve the results and find confirmations when making decisions, professional traders often use a combination of tools. By reading our Top 6 strategies with two indicators for digital options traders, you will find out more about those special strategies with two indicators. We will provide you with clear examples of how to employ them in digital options trading.

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What is a Technical Indicator

Before delving deeper into strategies, let’s see what a technical indicator is in trading. These tools represent math calculations that are conducted by a certain formula automatically. They calculate particular price stances or aspects for a given period. 

Technical indicators analyze historical data to predict future price fluctuations and movements. By using them, traders can evaluate financial markets and identify trading opportunities that may arise in various situations. Most technical indicators analyze price movement directions and oversold or overbought conditions. However, some of them can also be used to see the current market volatility, volumes, and even the strength of a price movement.

One of the advantages of technical indicators is that they can be used on various assets without any limitations. Whether you are trading Forex majors, crosses, OTCs, cryptocurrencies, stocks, and so on, you can always rely on technical indicators to solve your trading problems. 

In general, there are two main types of technical indicators:

• Trend-following or overlays. This type refers to technical indicators that allow market participants to pinpoint trends. They are based on calculating the average price for a particular period and smooth the data coming from charts the way to allow you to see a clear picture;
• Oscillators. As it comes from the name of those indicators, they oscillate from 0 to 100 allowing market participants to see whether the price is overbought, oversold, or the current market context is neutral.

Why Combining Technical Indicators?

One of the biggest problems of most technical indicators is that they provide a picture of the market context but do not allow market participants to anticipate any next price movement. There are only a couple of tools like Bollinger Bands or Ichimoku that are designed the way to allow traders to find entry points and try to predict future price fluctuations.

Therefore, using technical indicators separately will allow market participants to see the current market stance, but their usage is limited to this goal. To be able to make any forecasts, traders should arm themselves with something more reliable. This is where a combination of indicators comes into play.

Imagine that you are using a moving average with a long period to see the current market trend. If the price is above it, you can say that it is an uptrend while when it breaks below this long moving average, bears take control. However, how can you be sure about where to enter the market?

The simplest way is to add another moving average with a shorter period that will be more flexible to price fluctuations. The crossover of both will give you a signal about when to engage. By reading further, you will see some effective strategies that professionals use to find entry points in digital options.

1: Double Moving Average Crossover Strategy

The first one is very simple and straightforward. To start using it, you need to add two moving averages on the chart (SMA50 and SMA200). As was already mentioned, their crossover will provide you with a signal about a possible market reversal.

You can see two SMAs on the chart. The long one (the blue one) crosses the short one (the yellow one). When this happens, a trader buys a Lower contract. As the price breaks below the long moving average, the trend is bearish now. One of the greatest benefits of this approach is that it allows market participants to align their trades with the trend.

When to engage when using this strategy? At the very moment when both moving averages cross. For instance, in this particular example, you can buy a Lower contract at the very moment when the yellow moving average shows up below the blue one.

The strategy may seem perfect at first glance, but it has some minor drawbacks. First, moving averages are lagging indicators, which means that you will receive a signal sometime after the reversal takes place. This is not a big deal for digital options traders as their only goal is to predict the direction of price fluctuations for a given period. 

In general, this is a good strategy, but you have to remember that it can be lagging and you should be prepared to lose part of the movement.

Pros and Cons of this Strategy

This approach is great for digital option trading as it allow market participants to find clear signals along the local trend. One single drawback here is that this strategy uses lagging indicators, which is not a big problem for digital option traders who aim at capitalizing on movement direction. 

2: Moving Average and Stochastic

Moving averages are often used by various traders as they are good at demonstrating the balance between the buyers and the sellers in the financial markets. The SMA50 or SMA100 can be used by market participants to divide bearish and bullish market sentiment.

If the price is above the SMA50, for instance, you can suggest that the bulls are currently dominating the market, but when it plunges below this indicator, bears take control. However, this information may be not enough to make market decisions.

An example of a strategy using a moving average and stochastic

A good strategy will be to add something like stochastic to charts to find clear entry points. In the example above you can see how it works. The SMA100 is used as the support/resistance dynamic line. When the price is tested, you should check the situation with the stochastic indicator. If it leaves the overbought level, you can buy a Lower contract, while in the situation where stochastic is leaving the oversold area, you should buy a Higher contract.

This strategy benefits from two of the most popular and reliable indicators. The simple moving average is very good at identifying the market mood, which allows you to understand whether the price is likely to stay in the bearish or bullish zone. Moreover, the strategy can be applied for both Higher and Lower contracts, which makes it a universal tool for traders.

Pros and Cons of This Strategy

This approach allows market participants to trade in advance when the price movement direction is changing. It uses a momentum indicator, which predicts changes in advance. However, one drawback here is that the price may not reach the SMA100 or move above below it for sometime, which can make it more complicated to use this technique.

3: Bollinger Bands and Stochastic

When speaking about Bollinger Bands, this indicator is designed to pinpoint market trends and volatility. When combining it with the stochastic indicator, you can find good entry points for digital options trading at the moments when the price reverses or rebounds from various levels. Similar to the previous one, the Bollinger Bands is used here to show you dynamic support and resistance levels. By using this combination, traders know in advance that the next candle may be a reversal one.

What makes it a good strategy even for beginners? You don’t need to set up indicators on your own. Both can be used with their default settings allowing you to predict price fluctuations with a high level of precision.

Let’s see how it works. First, you need to check the current price position. If it is close to the upper band, then you need to prepare to open a lower trade. Then, you should check the position of the stochastic oscillator. It should be above 70, which means that the price should be in the overbought area. If both conditions align, you should wait until the stochastic breaks below 70. Once this happens, you should buy a Lower contract.

Similar to the previous situation, you can buy a Higher contract with this strategy. First, check whether the price is close to the lower band of the Bollinger Bands indicator. Next, identify the position of both stochastic lines. They should be in the oversold zone. To open a Higher trade, you need to wait until the stochastic breaks above 30.

Keep in mind that in all strategies where you use the stochastic indicator, you can choose between 30/70 and 20/80. The latter allows you to filter some false signals. However, in some cases, you may lose some interesting entry points as well.

Pros and Cons of the Strategy

The strategy uses two of the most popular technical indicators and it seems to be perfect as the Bollinger Bands are known for their reliability. You can use it even solely without any additional tool. Together with stochastic, it makes a perfect combination. However, similar to the previous strategy, here you may find yourself in situations when the price goes outside the bands or faill to reach them.

4: MACD and RSI

What if we add two oscillators to the charts? This will allow us to create a reliable strategy, which is no worse than all previous ones. By using a combination of MACD and RSI, you can find entry points in most market situations. Keep in mind that instead of RSI, you can use the stochastic as well.

The idea behind this strategy is to confirm a reversal. When both MACD lines cross above the histogram, it means that a downside reversal is possible. Therefore, you should check it with the RSI indicator for a confirmation. When the crossover takes place below the histogram, a bullish reversal is possible and you should check it again with the RSI.

Now let’s move to examples. When both lines of the MACD indicator make a crossover below the histogram, then you should prepare for trading. The next step before buying a Higher contract is to check the RSI. In our example, it breaks above 30, which confirms that the signal is relevant. At the very moment when the RSI leaves the oversold zone, a trader can buy a Higher contract.

When the crossover occurs above the histogram, a trader should be prepared to open a Lower trade. The signal will come at the moment when the RSI indicator leaves the overbought area. 

Pros and Cons of the Strategy

The MACD indicator provides reliable signals when its moving average have a crossover. By adding RSI signals, you can significantly improve the performance of the system. The profitability of such a strategy varies between 70% and 80% depending on the market context. If you use 20 and 80, you can lower the number of signals, but make them somehow more reliable.

5: Parabolic SAR and RSI

This is a combination of trend-following and momentum indicators, which allows digital option traders to capitalize on price reversals or corrections. Similar to other strategies, here you will find clear entries that will allow you to catch various price movements. 

The idea behind this strategy is to see when the dots of the Parabolic SAR indicator change their position (above or below the price). This will allow you to see a switch in the market sentiment that you can use to buy a particular contract.

How to use this strategy? First, you need to wait until the dots change their position. For instance, if it was a downtrend, then the dots were above the price. Once they appear below it, you can expect the downtrend to stop or to pause at least. 

Now it’s time to look at the RSI indicator. When the dots appear below the price, the RSI indicator should leave the oversold area, which you can clearly see in the example above. At this very moment, a trader can buy a Higher contract.

When it comes to the situation when the uptrend is over or paused, the dots appear above the price. At this very moment, you need to check the position of the RSI indicator. It should be above 70 or 80 (depending on your settings) and leave the overbought area. If this happens, buy a Lower contract.

This is a good strategy as together with the RSI signal, you have a confirmation from the trend-following indicator that the trend is over or at least stopped for a while. 

Pros and Cons of the Strategy

This combination works together well as the RSI will support the Parabolic SAR indicator in polishing and refining your trading system. However, you should keep in mind that Parabolic is known for redrawing if market conditions change. Therefore, you should practice this strategy before applying it in trading. The main disadvantage of the system is that you can get false signals if PSAR changes its value.

6: Parabolic SAR and SMA20

The next strategy is based on the Parabolic SAR indicator and the simple moving average with a period of 20. The idea behind it is to confirm the change in a trend with a crossover when the price breaks below or above the moving average.

In this example, you can see that the Parabolic SAR indicator starts drawing dots below the price. This is the first part of the signal. The second one is when the price breaks above the SMA20. At this very moment, you can buy a Higher contract. The strategy was developed for FX traders initially, but it works for digital options as well.

In the opposite situation, when the dots appear above the price, you should wait for the quotes to break below the SMA20 to place a Lower trade.

Pros and Cons of the Strategy

The technique’s main benefit is that it gives quite reliable signals. However, you should keep in mind that these signals are lagging and you will lose part of the movement before getting into the market. For digital opinion traders this drawback is minor as even one pip may bring you significant profits.

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Conclusion

These are the most popular trading strategies using two indicators. They are mostly used by professional digital options traders who want to be more sure about the outcome of each of their trades. All these indicators can provide you with reliable signals even when used separately. However, when you combine them, you can expect even better performance.

FAQ

What Is the Best Strategy Using Two Indicators?

There is no best strategy with two indicators. All of them are good in each particular situation. You should choose one or several that suit your trading style.

Can I Use More than Two Indicators? 

Yes, some trading strategies use more than two technical indicators. However, you should make sure that all tools that you use work together well.

Is It Possible to Use Two Indicators of the Same Type?

Yes, it is. There are trading strategies where you can use two trend-following indicators or two oscillators. Keep in mind that these indicators should add each other.

Why Traders Often Use Two Indicators?

This allows market participants to confirm their trading signals and make more informed trading decisions.